Demystifying VAT for Businesses: A Practical Guide

Welcome to the next article in our Accounting & Tax 101 series — short, plain-English guides to help you understand the numbers that matter.

VAT (Value Added Tax) is one of those things most business owners have heard of — but not many actually feel confident about. It often feels like a maze of rates, returns, and rules. The good news? At its heart, VAT is much simpler than it looks. Here’s how to think about it.

1. VAT is a tax you collect for HMRC

When you’re VAT-registered, you add VAT (usually 20%) to your sales. That’s not your money — you’re collecting it on behalf of HMRC.

2. You can reclaim VAT on your costs

If you’ve paid VAT on things you buy for the business, you can usually reclaim it. For example:

• Buy stock for £1,000 + VAT (£200) → you can claim the £200 back.

This stops VAT from becoming a cost to your business.

3. What you pay (or reclaim) is the difference

At the end of each quarter, you work out:

VAT you charged customers – VAT you paid suppliers = VAT owed to (or reclaimable from) HMRC.

Example:

• You charged customers £5,000 of VAT.

• You paid £2,000 of VAT on purchases.

• You owe HMRC £3,000.

4. Not everything has 20% VAT

While 20% is the standard rate, some items have:

• 5% (e.g. domestic energy)

• 0% (e.g. most food, children’s clothes, books)

• Or are exempt (e.g. some financial services and rent).

That’s why it’s essential to understand the regulations that apply in your sector.

5. VAT registration and returns

You only need to register for VAT once your taxable sales go over £90,000 in a 12-month period (2025/26 threshold). Some businesses choose to register earlier if it suits them.

Once registered, you must file VAT returns — usually every quarter — even if you’ve made little or no sales. HMRC expects these returns, and late submissions trigger penalties.

6. VAT on assets, stock and deregistration

When you register for VAT, you can usually reclaim VAT you’ve recently paid on:

• Stock you still hold (and will sell after registration) — you can usually go back up to 4 years.

• Assets like equipment or computers (as long as they’re still in use) — normally you can go back up to 4 years, or 10 years for bigger items like property.

When you deregister, the opposite applies:

• If you still have stock or assets that you originally reclaimed VAT on, you may have to pay some VAT back to HMRC.

This makes sure VAT is collected at least once on goods that are still in the business.

Why it matters

• Get it right → VAT is just a “pass-through” tax, collected and handed on.

• Get it wrong → you can lose money or face penalties.

Our advice

VAT doesn’t have to be scary. Think of it as money you’re holding for HMRC, minus what you can claim back.

Here at Accounts Action, we don’t just file the paperwork. We have a dedicated VAT team whose job is to take the strain away from you — working out what needs charging, what you can reclaim, and making sure your returns are correct and on time. That way, you can focus on running your business, not chasing receipts.

This article is part of our Accounting & Tax 101 series — short guides to help you understand your accounts without the jargon.